Published: July 8, 2013
The Indian government’s decision to double natural gas prices from April 2014 ostensibly to incentivise domestic gas production may render nuclear power less uncompetitive, an outcome that is largely unappreciated, but perhaps not unintended. The steep hike in domestic gas price is bound to freeze, if not drive down the share of natural gas in India’s already skewed energy basket with its attendant implications for energy security. Disproportionately weighed down by coal, which now accounts for more than 85 per cent of actual power generation from all sources, India’s energy basket has little room for manoeuvre. While imported coal will certainly appear more viable now, its absorption will be hamstrung by bottlenecks in port and handling infrastructure. Certainly no new gas-based generation will come up and even existing Combined Cycle Gas Turbine (CCGT) plants are likely to remain stranded.
Since power abhors a vacuum (pun intended), nuclear power from imported reactors, hitherto lurking in the background might emerge from the shadows to stake its claim in India’s energy basket. After all, like our universe, the energy industry is also ruled by the laws of relativity! That should be good news for the United States, which, having pushed through the 123 Agreement in the teeth of opposition from its own domestic constituency, has been waiting in suspended animation to operationalise it for the benefit of its reactor manufacturers. No doubt, U.S. companies have to compete with worthy rivals like Areva of France for a slice of the Indian market, but at least the market may open up now.
The United Progressive Alliance government which considers the Indo-U.S. nuclear agreement its crowning glory, has been at great pains to fully operationalise it, ostensibly to enhance India’s energy security, but has not succeeded largely because of cost factors. Imported light water reactors are hugely expensive to build and necessitate continued reliance on increasingly expensive, imported, enriched uranium. All these translate to very high level power tariffs even with substantial latent and patent subsidies, a detail that has been drowned in the din over the safety and environmental aspects of nuclear power. That nuclear power from imported reactors would still be too steep for India and even a couple of imported reactors may set back our power sector by decades a la Enron, will be a problem for a future government to grapple with. For the moment, high gas prices would tend to persuade us that nuclear power from imported reactors is indeed the only way forward.
As for gas pricing, the premise on which the guiding formula has been justified seems to be rather flimsy, a point that has already been made by Surya Sethi and others, but still bears repetition. First of all, an invidious distinction has been made between those recommendations that would be applied prospectively and those that would take effect during the currency of production sharing contracts already under implementation. Thus, tinkering with production sharing contract (PSC) terms to ensure that production costs are not unduly inflated by the contractor has been kept in abeyance to be applied to future PSCs while pricing decisions will apply to existing PSCs.
That Krishna-Godavari (KG) D-6 production costs have been gold-plated is a well-documented fact which has even drawn the especial attention of the Comptroller and Auditor General (CAG). The Rangarajan Committee report admits as much and concedes the need for putting in place a robust mechanism to check gold-plating of upstream costs. Yet, this key lacuna will remain unaddressed in the case of existing PSCs even as higher prices will bestow substantial and unwarranted benefits on the operators, as has already been pointed out by several eminent observers. In fact, there is little justification for so steep a hike in the price of gas from already discovered fields of Reliance Industries Limited (RIL) which were supposed to supply at least 80 million metric standard cubic meter per day (mmscmd) even at U.S. $4.20/mmbtu [million metric British thermal units], but produce less than a quarter of that quantity. Reliance even built a hugely expensive pipeline across the country to carry 80 mmscmd of its own production. This pipeline is now being subsidised by a few unfortunate users who consume the meagre volumes of gas it transports.
The premise that higher prices will automatically and inevitably lead to higher exploration and production (E&P) and therefore, higher gas output, is not only flawed but even misleading. The Union Petroleum Minister prepares the ground, as it were, by claiming a few weeks ago that India is virtually floating on hydrocarbons. He makes out a case that it is only inadequate exploration that keeps our country dependent on imports. The preface to the Terms of Reference (ToR) to the Rangarajan Committee almost anticipates the recommendations: it waxes eloquent on the attractive prospects of the grossly under-explored sedimentary basins, and almost implies that only a well head price hike stands between the cornucopia of black gold and the investments needed to pour it out. The committee itself rises to the bait and uses convoluted logic to justify doubling of gas price, providing a fig leaf to the government to justify the hike.